Latin America: Technology Revolution?

In 2011, four college friends decided to create a search
website that would provide discounts, bargains and benefits for those users who
had one or more credit cards or debit cards. They gave birth to Skonto, which
became the first Argentine application to take part in Store, the Microsoft
software shop for Windows 8. Thus far, the founders – including marketing
students Diego Verzino and Federico Del Pup, and two students specializing in
computer science -- have depended on support from UADE, the Argentine business
school, but they are working to ensure that the business will eventually pay
for itself.

Skonto is one of several technology companies that have
been emerging all across the region in recent times. According to some experts,
the trend indicates that the sector is poised for a revolution. Last October, The Economist took note of
that phenomenon when it published an article entitled, “The Lure of Chilecon
Valley.” That piece highlighted the public policies of the country, exemplified
by Start-Up Chile, an initiative established in 2010 with the goal of
attracting technology talent and creating a Silicon Valley on a small scale.

“Basically, the initiative involves the Chilean government
co-investing with local investors in a non-recoverable fund,” notes Paris de
l’Etraz, director of the IE Business School’s Venture Lab. The goal of the fund
is to incubate the development and growth of start-up companies. The
state-owned entity provides 90% of the funds for developing the group, up to
the level of US$40,000 per company. “But it does not try to become an investor;
it only wants to help local companies grow. If an entrepreneur arrives with
references, and is qualified, [the fund] assumes part of the investment,” notes
De l’Etraz. Thanks to this initiative, which requires entrepreneurs to stay in
the country for at least seven months, Chile is taking the lead in the region
when it comes to entrepreneurial initiatives.

Nevertheless, comparisons with Silicon Valley can be
exaggerated, adds De l’Etraz, who just attended several “Venture Days” in Latin
America, during which start-ups presented themselves to audiences of local and
international investors. “People believe that Silicon Valley is something that
can easily be replicated, but its entrepreneurial ecosystem is quite special.”
In his view, the most outstanding thing [about Silicon Valley] is that its
angel investors have previous experience as entrepreneurs and, as a result,
they “recognize the entrepreneurial mentality; they can identify an
entrepreneurial project and team; and they know how to evaluate it and make it
grow.” Nevertheless, in most areas of the world, including Latin America, angel
investors and those who manage investment funds do not have an entrepreneurial
character. “They come from investment banking, not from entrepreneurship.” So,
“the mindset of this type of investor needs to be changed.”

Beyond that, Silicon Valley has two of the most
prestigious engineering schools in the world – Berkeley and Stanford - as well
as a diversity in its population that is very hard to replicate. Many countries
have tried to duplicate the model of Silicon Valley, and some of them have
succeeded a great deal, such as Israel. “But [Israel] is a special case,
because it takes in a lot of money from the United States, and there are lots
of investors and funds that originate in the U.S. In addition, there is a very
strong entrepreneurial culture there,” he points out.

Now, however, the barriers to becoming more like Silicon
Valley are starting to fall away, says De l’Etraz. He notes that countries such
as Spain are transforming themselves into new destinations for establishing
their own start-ups because in these countries “salary levels are lower [thus,
more competitive]; there is a good educational system; there is a workforce
with technical experience and the quality of life is high. Meanwhile, prices in
Silicon Valley are prohibitively expensive.” As an example, he cites Tyba, a
company founded by foreign students who live in Spain, which helps connect
companies with young talent over the Internet.

The same conditions that exist in Spain are surfacing in
numerous countries in Latin America. Javier Zúñiga, director of computer
engineering at UADE in Argentina, notes that entrepreneurs in his country
depend on “a very good quality of human resources in its educational system,
and a high level of English training for international projects and activities,
which is something fundamental in IT.”

THE OBSTACLES

Nevertheless, there are some obstacles that still need to
be overcome. Del Pup, the 29-year old Argentine who co-founded Skonto,
complains about the lack of risk financing, not just in his homeland but in the
rest of the region. He adds that there are not enough governmental institutions
that support entrepreneurs, “despite the fact that the [technology sector] is
growing and needs to be pushed.”

De l’Etraz adds that during a recent visit to Argentina,
he noticed that entrepreneurs were nervous about the shortage of foreign
confidence in the local market, which has compelled many start-ups to leave for
other countries. “On Venture Day in Mexico, there were several Argentine
projects. The same thing happened in Colombia. Argentines are very entrepreneurial,
and they know how to sell. The country offers many opportunities, but so long
as the political situation remains unstable, things are not going to grow the
way they should.”

According to Martin Vivas, the facilitator of Startup
Weekend in Buenos Aires, an initiative that aims to set up new companies in
just three days, the investment funds don’t always get to Argentina. “Investors
try to create a relationship with entrepreneurs and, in that sense,
[entrepreneurs here] are a bit far away,” notes Vivas, who is a member of
Palermo Valley, a community of entrepreneurs that tries to promote the Internet
sector while traveling to other markets. “We have seen projects of other
countries that were not different from ours. We have high quality professionals,”
he says.

De l’Etraz notes that there is a crucial problem to solve
in the region: How to create favorable fiscal policies for angel investors
through tax deductions in case they suffer losses. “On July 10, we have a
Venture Day in Colombia, and one of the requirements is that the companies are
Colombian. But what does it mean to be Colombian when many companies are set up
in Miami but do business in Colombia and in other places because of the tax
situation [in Colombia]?”, asks De l’Etraz. “Governments must take this topic
seriously and create policies, such as those in the United States, in order to
attract investments and make it attractive, in terms of taxation, to take risks
in the world of the start-up.”

Given that situation, De l’Etraz does not believe that a
technological revolution is taking place in the region at this time. However,
he does believe that it will take place in the future. The number of
entrepreneurial events has increased, he notes, and there is greater
involvement on the part of governments. He points out, for example, that there
is a “macro event” for entrepreneurs organized in November by the government of
Peru. Nevertheless, he warns that the private sector has to get involved if the
long awaited growth in this sector is to take place.

THE ACCELERATORS

Meanwhile, some entrepreneurial
“accelerators” and initiatives that are looking for innovative projects have
arrived “at the end of the world,” as the new Argentine-born Pope Francisco has
dubbed Argentina. These initiatives have provided an economic boost to the
country.

One such initiative is Wayra, an accelerator that belongs
to Telefónica, the telecom firm. Wayra provides seed capital of up to $50,000
to those start-ups that are “hungry” to grow and expand beyond their own frontiers.
“Wayra was conceived for Latin America because we imagined that [the region]
had the entrepreneurial ecosystem that we were searching for,” notes Andres
Saborido, country manager at Wayra Argentina. “We knew that the projects in
this region were good ones, so we expanded first in Argentina, Colombia, Mexico
and Spain. The conditions were ideal in the sense that there was a lot of
talent -- people who had various initiatives and ideas but who did not have the
resources to move forward.

“We offer these people a work space at Telefónica, and
for four to 12 months we help them with coaching and mentors so that they will
focus on understanding legal aspects of corporations, as well as product
design. We try to provide them with quick methods for developing applications,
testing them and giving them value, even within just a weekend,” says Saborido.

Once all that has been completed, Wayra offers the
possibility of working with Telefónica. “This gives the entrepreneur a scale
[of operations] because we are in 12 countries. In return for these services,
we retain 10% of the equity or capital of the start-up, but the decision about
whether or not to provide services to Telefónica is left up to the
entrepreneur,” he says. That happened in the case of Joincube, an Argentine
business-to-business social network that involves both Telefónica as well as
firms in other countries. In Chile, Joincube even received capital from an
investment fund.

Wayra’s Saborido notes that entrepreneurs are often
waiting for the arrival of angel investors. However, since capital is not
available for everyone, in his view “the interesting thing is that companies
focus [instead] on a regional or global market, so that they can access foreign
funds.” Wayra has already invested in 18 companies in Argentina, and 180
companies worldwide.

LEARNING HOW TO FAIL

During the initiative known as Startup
Weekend, each participant pitches an idea for one minute. The best pitches are
chosen in a vote, and the winners are equipped with teams for developing them.
However, it rarely happens that the “start-ups become real companies,” notes
Vivas. Nevertheless, in his view, these events help participants acquire the
skills and experience that are going to help them forge their future as
entrepreneurs. They learn how to make mistakes, which is very useful in the
case of Argentine entrepreneurs, who are “very easily frustrated, unlike
English-speaking entrepreneurs, who know how to wait until an idea [catches on]
and matures over time.”

Vivas stresses that although Argentines have other strong
qualities – such as skill at resolving complicated problems – they have trouble
planning ahead, “perhaps because we are constantly in a crisis mode.” As a
result, it is hard for them to plan over the long term, with a view five years
ahead. In Argentina, “Entrepreneurs expect great results in just a short time,”
he says.

On the other hand, entrepreneurs in the region face
another handicap from a cultural viewpoint. “An entrepreneurial failure is
considered a personal failure,” notes De l’Etraz. In his view, tax policies
also have an influence on all this. “They are always telling you not to be
afraid of failing, but they don’t help you to feel that way because if your
project does fail, you can’t just wipe the slate clean, since you carry your
debts with you [into the future]. In contrast, in the U.S., if I am an
entrepreneur and I fail, and my company goes bankrupt, I can wipe the slate
clean and start all over again.”

In addition to learning how to make mistakes, experts note
that Latin American entrepreneurs must overcome their fear of relying on an
idea. As Vivas explains, “Often, entrepreneurs believe that they are going to
be robbed, and this also has to do with their fear of failure. In Latin
America, they start with the view that competition is the enemy -- that it is
bad to make mistakes. But [in fact,] our enemies teach us. This is a
transparent industry, and if you are doing well it is because you are doing
things the right way.”

In that respect, Skonto’s Del Pup offers this
recommendation: “Although an idea may seem like a small one, you need to talk
about it and act on it. You have to consider the project, and the more
people who participate in it, the better. It can’t be just one person against
the world.” In fact, his company brought in Ignacio Raffa and Nicolas Vilela,
two computer science students, to add value to their technical department. “It
was very important because it added a different perspective for the business.
Everyone wins when your plans bear fruit; it is another way of cooperating in a
cost-effective way.”

On the other hand, UADE’s Zúñiga notes that some projects
that begin within a computer science career path lack commercial vision. “We
help [those sorts of students] link up with students who have other
specialties. We try to work with them and add the part that they are missing in
their professional training, such as how to create a business plan,” he notes.

Overall, adds De l’Etraz, universities have a great deal
to contribute when it comes to strengthening entrepreneurial activity in the
region. “Students are the ones who have to begin to think like entrepreneurs.
We have to start teaching them that learning how to fail is as much a part of
the learning process as learning how to sell. This is the big challenge.”